5 Tips for Building Your Credit If You Want to Buy a Home

When buying a new home, one critical factor could determine your fate: your credit score. Without a decent credit score, your mortgage application may be turned down outright. Even if it’s not, you could end up paying a significantly higher interest rate.

If your credit score isn’t as lofty as you’d like, it isn’t too late to give it an extra boost. In this article, we detail some ways to build your credit so you can buy the home you want.

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1. Apply for a Secured Credit Card

As noted, your credit score can make or break your dreams of homeownership. To turn those dreams into reality, you need to ensure your credit history reflects your financial responsibility. If you suffer from a low credit score, this can be a difficult task. 

That’s where a secured credit card can come in handy. Although a secured credit card may look like any other credit card, you don’t need to have a high credit score to qualify. That’s because, unlike a traditional credit card, these cards require a cash deposit or initial funds transfer. This lowers the card issuer’s financial risk, so they’re more likely to approve your application.

The amount you deposit will be your credit limit amount. For example, if you deposit $500, your credit limit then becomes $500. As long as you pay your bills on time, your credit score will increase. This can be an easy and reliable way to give your credit score the jump-start it needs. If you have a short credit history or low credit score, a secured credit card is a great credit-boosting tool.

2. Send Payments On Time

Paying your bills when they are due is vital to a healthy credit score. Payment history makes up 35% of your score, so on-time payment is crucial to maintaining a good one. it may determine whether or not you get your home loan. 

To prevent missed payments, consider setting up an autopay schedule. To avoid overdraft fees, make sure the account you are automatically withdrawing from has enough funds to cover the costs. 

Another way to prevent overdraft fees is to schedule big payments on different dates of the month. For example, set your car payments to be taken out at the beginning of the month and your student loans at the end. This way you don’t have to worry about your account being drained all at once. To see whether this option is available to you, contact your creditors. In the meantime, continue to pay your bills as currently scheduled to prevent any late payments. 

3. Avoid New Debt

You’re itching to get into the new home you envision and finally be able to decorate your space the way you like. What’s the harm in opening that furniture store credit card ahead of time? After all, you’re going to want to hit the ground running. 

Not so fast. Although the prospect of filling your new home with fresh, shiny objects is tempting, it’s essential to avoid creating new debt beforehand. Credit applications will lead to “hard inquiries” into your credit file, and too many can reduce your score. 

New debt is often considered a red flag by lenders. Opening new lines of credit while applying for a home loan can make you look financially unstable. Instead of opening new accounts, work to pay down balances on your established long-term credit accounts. Doing so will show potential lenders that you are financially savvy and reliable.

4. Maintain a Low Debt-to-Income Ratio 

Your debt-to-income (DTI) ratio is how much of your monthly income you spend on debt repayment. For example, if your monthly income is $5,000 and you make $1,000 in monthly loan payments, your DTI is 20%. 

A low DTI is preferred by lenders because this ratio proves you can pay off your outstanding loans. Any DTI ratio above 44% is considered poor. If your DTI falls into the poor range, you’ll need to reduce it by either paying down existing debt or increasing your income.

Along with your current DTI, lenders also calculate how your future home loan could affect your ratio. To prepare for your new home purchase, calculate your current DTI and determine whether your home loan could raise it to an unmanageable level. If it does, you should defer your home purchase until you’re financially ready. 

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5. Keep Old Accounts Open

Although it may be satisfying to close your accounts after working hard to drain them, leaving them open is better. Another significant factor in your credit score, accounting for 30%, is your credit utilization ratio. A credit utilization ratio is the amount of available credit you have versus the amount you are using. If you close a current account, your available credit is reduced, thereby increasing your percentage of credit in use. This higher proportion can leave your credit score in poor standing.

Experts advise maintaining a credit utilization ratio of 30% or lower. An easy way to avoid a bad credit utilization ratio is to keep credit card accounts open, even if the balance is zero. Another way to maintain a good ratio is to pay your balances down as you are able. The lower your ratio, the higher your credit score. Even if you aren’t planning to buy a home anytime soon, maintaining a good credit utilization ratio shows fiscal responsibility to future lenders. 

Happy House Hunting

Depending on your current score, building up good credit can be a lengthy process. Whether you are looking to buy a house this year or next, it’s a good idea to start preparing now. Taking steps to improve your score, like those outlined above, can help you get the desired results. Make buying your dream house a reality by building your credit today!